The goal of this master's thesis is to investigate whether the ambiguous relationship between the sustainability of an ESG mutual fund and its performance is due to the fact that ESG mutual funds are subject to behavioral biases. The structure of this master's thesis is divided into three parts. First, it will be investigated if global ESG equity mutual funds domiciled in Europe are subject to the home bias, that is that a too large fraction of the equity investments is invested in domestic stocks. Furthermore, it will be investigated whether ESG mutual funds are subject to a Europe bias (whether a disproportionately large fraction of the equity investments is allocated to stocks from Europe) and finally whether ESG mutual funds are subject to the industry bias (their holdings are heavily allocated to individual industry sectors).
Secondly, the financial performance of ESG mutual funds in the period from August 2017 to August 2021 was examined using the Capital Asset Pricing model (CAPM) and the Carhart four-factor model like in the most important works on ESG mutual fund performance. Furthermore, it will be investigated whether the ESG mutual funds perform worse than their unsustainable counterparts (i.e. conventional investment funds via a matched-pair sample). Thirdly, it will be investigated whether behavioral biases have an impact on the performance of ESG mutual funds and lead to possible under-diversification.
Inhaltsverzeichnis (Table of Contents)
- 1 Introduction
- 2 Theoretical background
- 2.1 ESG investing as a special form of investment
- 2.1.1 Fundamentals of investing, mutual Funds and fund managers in general
- 2.1.2 Conceptual delimitation and special features of ESG investing
- 2.2 Behavioral biases and their influence on investment decisions
- 2.2.1 Traditional finance vs Behavioral finance
- 2.2.2 Behavioral biases
- 3 Literature review
- 3.1 ESG investing
- 3.1.1 Sustainable investing and financial performance
- 3.1.2 Behavior of ESG investors
- 3.2 Behavioral biases and their potential role in ESG investing
- 3.2.1 Home bias and Europe bias
- 3.2.2 Industry bias
- 4 Hypothesis development
- 4.1 Behavioral biases of ESG mutual funds
- 4.2 Performance of ESG mutual funds
- 5 Data and methodology
- 5.1 Data and descriptive statistics
- 5.1.1 Data
- 5.1.2 Descriptive statistics
- 5.2 Methodology of measuring behavioral biases
- 5.2.1 Home bias
- 5.2.2 Europe bias
- 5.2.3 Industry bias
- 5.3 Performance measures
- 5.3.1 Capital-asset-pricing model
- 5.3.2 Carhart four-factor model
- 5.3.3 Characteristic based performance measure
- 5.3.4 Regression model
- 6 Results
- 6.1 Main results of behavioral biases in ESG mutual funds
- 6.1.1 Evidence of Home Bias
- 6.1.2 Evidence of Europe Bias
- 6.1.3 Evidence of industry Bias
- 6.2 Main results of the performance analysis of ESG mutual funds
- 6.2.1 Performance measures
- 6.2.2 Impact of behavioral biases on ESG mutual fund performance
- 6.3 Robustness
- 6.3.1 Alternative measurement approaches
- 6.3.2 Sub-period performance
- 6.3.3 Performance before and after expenses
- 6.3.4 Robustness home bias
- 6.3.5 Robustness Europe bias
- 6.3.6 Robustness industry bias
- 7 Limitations
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This master's thesis investigates behavioral biases within the context of ESG (Environmental, Social, and Governance) investing. The primary objective is to analyze the presence and impact of specific biases—home bias, Europe bias, and industry bias—on the investment decisions and subsequent performance of ESG mutual funds. * The prevalence of behavioral biases in ESG investing. * The relationship between behavioral biases and the performance of ESG mutual funds. * A comparative analysis of ESG and traditional investment strategies. * The identification of specific behavioral biases affecting ESG fund managers. * The implications of these biases for investors and the broader ESG market.Zusammenfassung der Kapitel (Chapter Summaries)
1 Introduction: This chapter introduces the topic of behavioral biases in ESG investing, highlighting the growing importance of ESG considerations in the investment world and the potential influence of cognitive biases on investment decisions. It sets the stage for the research by outlining the research questions and the structure of the thesis. 2 Theoretical background: This chapter provides the theoretical foundation for the study. It begins by defining ESG investing and differentiating it from traditional investment approaches. It then delves into behavioral finance, contrasting it with traditional finance theory and exploring various relevant behavioral biases that could affect investment decisions within the ESG context. Key concepts like prospect theory and herding behavior are discussed. The chapter lays the groundwork for understanding the potential impact of these biases on ESG investment strategies. 3 Literature review: This chapter presents a critical review of existing literature on ESG investing and behavioral biases in finance. It examines the relationship between sustainable investing and financial performance, exploring the arguments and empirical evidence from previous research. Further, it reviews studies on the behavior of ESG investors, analyzing how biases like home country bias might influence their portfolio allocations. This chapter serves to contextualize the current research and identify gaps in the existing literature that this study aims to address. 4 Hypothesis development: Based on the theoretical background and literature review, this chapter formulates specific hypotheses regarding the presence and impact of behavioral biases (home bias, Europe bias, and industry bias) on the investment strategies and performance of ESG mutual funds. The hypotheses are clearly stated, providing a roadmap for the empirical analysis conducted in subsequent chapters. This chapter articulates the expected relationships between variables and provides a justification for the chosen research methodology. 5 Data and methodology: This chapter details the data collection process and the methodological approach used to test the hypotheses. It describes the dataset, providing descriptive statistics of the ESG mutual funds under examination. It outlines the specific methodologies employed to measure the three key behavioral biases (home bias, Europe bias, and industry bias) and explains how fund performance will be assessed, utilizing established models like the CAPM and Carhart four-factor model. This chapter ensures the transparency and replicability of the research.Schlüsselwörter (Keywords)
ESG investing, behavioral biases, home bias, Europe bias, industry bias, mutual funds, sustainable investing, financial performance, portfolio allocation, investment decisions, behavioral finance, traditional finance, CAPM, Carhart four-factor model, empirical analysis.
Frequently Asked Questions: Analysis of Behavioral Biases in ESG Mutual Funds
What is the main topic of this academic paper?
This master's thesis investigates behavioral biases within the context of ESG (Environmental, Social, and Governance) investing. It focuses on analyzing the presence and impact of home bias, Europe bias, and industry bias on the investment decisions and performance of ESG mutual funds.
What are the key objectives of the research?
The primary objective is to analyze the presence and impact of specific behavioral biases (home bias, Europe bias, and industry bias) on the investment decisions and subsequent performance of ESG mutual funds. Secondary objectives include examining the prevalence of these biases in ESG investing, comparing ESG and traditional investment strategies, identifying biases affecting ESG fund managers, and exploring the implications for investors and the ESG market.
What theoretical background is used in the study?
The study uses behavioral finance as its theoretical framework, contrasting it with traditional finance theory. It explores relevant behavioral biases like prospect theory and herding behavior, explaining their potential influence on ESG investment strategies. The fundamentals of ESG investing and traditional investing are also defined and differentiated.
What literature is reviewed in the paper?
The literature review examines existing research on ESG investing and behavioral biases in finance. It focuses on the relationship between sustainable investing and financial performance, and analyzes studies on the behavior of ESG investors, specifically looking at how biases like home country bias might influence their portfolio allocations.
What hypotheses are tested in the study?
The study formulates specific hypotheses regarding the presence and impact of home bias, Europe bias, and industry bias on the investment strategies and performance of ESG mutual funds. These hypotheses are tested using empirical analysis.
What data and methodology are employed?
The study describes its data collection process and methodology for testing the hypotheses. It details the dataset, including descriptive statistics of the ESG mutual funds analyzed. The methodologies used to measure the three key behavioral biases are explained, along with the performance assessment methods, which include the CAPM and Carhart four-factor model.
What are the main results of the study?
The results section presents findings on the presence of home bias, Europe bias, and industry bias in ESG mutual funds. It also analyzes the performance of these funds and investigates the impact of behavioral biases on their performance. Robustness checks are conducted using alternative measurement approaches and sub-period analysis.
What are the limitations of the study?
The limitations of the study are discussed, acknowledging potential constraints or factors that could affect the validity or generalizability of the findings.
What are the key words associated with this research?
Key words include ESG investing, behavioral biases, home bias, Europe bias, industry bias, mutual funds, sustainable investing, financial performance, portfolio allocation, investment decisions, behavioral finance, traditional finance, CAPM, Carhart four-factor model, and empirical analysis.
What is the structure of the paper?
The paper is structured into several chapters: Introduction, Theoretical background, Literature review, Hypothesis development, Data and methodology, Results, and Limitations. Each chapter is summarized in the document's overview.
- Quote paper
- Stefan Briehl (Author), 2022, Behavioral Biases in ESG Investing, Munich, GRIN Verlag, https://www.grin.com/document/1189888
